November 11, 2009

MS OVERVIEW 2009.11.11

CHINA DATA:October economic data just released...Generally positive, indicating continued economic recovery. Policy-driven components (monetary + investment) are not growing as aggressively as forecast, but overall economic activity (IP and retail sales) are showing further healthy acceleration. All in all, the economic recovery can still be described as ON TRACK, but not yet overheating, calming fears for imminent shift in policy stance towards tightening, especially in light of the latest CPI / PPI / RMPPI data. Trade datareaffirms that the Chinese economy remains dependent on DOMESTIC demand as external environment takes time to recover and this mediocre data should limit the risk of premature tightening. KEY DATAPOINTS:* IP (+16.1% YoY in Oct, +0.4% MoM SA) and retail sales (+16.2% YoY in Oct, +1.4% MoM SA) came in right in line with expectations. * Urban FAI (+33.1% YTD, +31.2% in Oct, -4.3% MoM SA) was weaker than expected. * CPI (-0.5% YoY, -0.2% MoM SA) and PPI (-5.8%, -0.7% MoM SA) still recording more deflation than expected, suggesting that reflation is coming through slower than expectation. * RMB new loans Rmb253 bn, though lower than our (300 bn) and market (370 bn) expectation, still represents 39% YoY increase, as October is traditionally a slow month for loan creation. Loan (+34%) and M2 (+29.4%) growth were also just a tad below forecast, in line with the new loan number. * Trade Data: Exports -13.8% in Oct vs Sep -12.5%, broadly in line with forecasts, vs rumors over the past few days that ranged from -18% to positive (!!). On MoM SA basis, exports fell 9.1%, which is the first MoM decline since the data series was made available. Imports were weaker than expected nevertheless, -6.4% YoY, though +7.3% MoM. Trade surplus US$24 bn, larger than forecast.

ASIA SO FAR: (J Grafton) HSI +70bps, Taiwan +67bps, ASX +50bps, MXASJ +16bps, NKY unch, Nifty -10bps, H-Shares -20bps, Kospi -30bps, A-Shares -65bps. A slew of China October data to chew on. Bottom line is it all looks supportive to the recovery story. Bit of noise about the drop in loan growth but October is seasonally weak and with FY targets already met it is largely irrelevant. The trade surplus gapped to $24bn ($18.9 expected). In Taiwan, The Financial Supervisory Commission yesterday took another step to fight against “hot money” for currency speculation, saying it would prohibit overseas funds from being parked in local banks’ time deposit accounts, effective immediately. Taiex spiked late in morning on talk of significant inflows in the next MSCI rebalance and the old story of imminent signing of the MOU. HSBC has traded at a discount to London all morning opening on the highs drifting as the covering subsided. Kospi is still jittery amid more reports of tensions building in the Yellow Sea. We have been slightly better to buy with volume in line with the 20-DMA. Financials (36%) 1.3x BTB, Tech (17%) 3x BTB and Industrial (14%) 2x BTS.

EURO RECAP: (J da Silva) Eurostoxx: -0.13% FTSE: -0.09% CAC: unch DAX: -0.12% Tuesday was choppy and we crossed the unchanged mark 8 times throughout the day, ending up just off the lows. We had plenty of numbers out first thing: Financials were mostly positive with HBSC +4%, Intesa +1.5%, Schroders +1.65%. The exceptions were Barclays, which traded down 5% on its low quality beat, and Julius Baer which traded down 6.8% after disappointing on inflows. Vodafone closed down just 1.45% despite a perceived "hidden profit warning" on emerging markets, as it recovered from its intraday lows and we saw big buying into the close. Imperial Tobacco reporting generally inline was taken well (+2.3%) and we saw very good 2-way flow in the name.

CREDITRECAP: (E Pénot) Main 84-84.5 (-), Xover 512-513 (-), HIVOL 138-139 (+1). Very quiet session with light flows and a lack of direction. It feels like accounts are stepping on the sidelines and unwilling to add any significant risk into year end. Much focus was in the primary market today, as accounts feel comfortable buying bonds in the primary given that the vast majority of new deals this year have performed extremely well. The yieldy names that came to the market today felt a little weak in the secondary (Fiat and FCE) while a high quality name like ANZ tightened 10bps in the secondary. In single name protection, most of the flow was with correlation desks that are in general buyer of the curve in the short end to sell the curve in the long end.

FX: (E Lawson)We remain positive on EUR. The data continue to show steady, if not spectacular, growth prospects in the euro area, and today's ZEW should continue in this vein. Last week showed the ECB's credibility, especially in comparison to the BoE and Fed. So while the USD comes under pressure due to policy concerns, EUR is the natural, liquid G3 currency to take up the slack. We are less concerned about EUR in the context of fiscal expansion as well. Furthermore, we expect there is ongoing reserve manager demand. In the present USD negative environment we believe there is upside in EUR while we believe there are fundamental mispricings in EUR/GBP. KEY RECOMMENDATION:Long EUR/USD, long EUR/GBP.

DOWNUNDER DAILY (G Minack)US companies continue to do better on cost cutting, leading tobetter-than- expected earnings and productivity in the current reporting season. However, this is unlikely to lead to a sustained profit recovery and is actually adding to deflation and double-dip risks. The September quarter reporting season repeated the pattern of the past two: profit surprises have again been due to cost-out, rather than revenue. With 389 S&P500 companies reporting, non-financial earnings have beaten forecasts by 5%. But dollar-weighted revenues have fallen 0.7% short of forecasts. The simple point is this: if fixed costs are being cut, then operational leverage will be lower, not higher, in the recovery. If variable costs are being cut, then presumably they will be added back in the recovery.Macro data have likewise surprised. Non-farm business productivity jumped 9.5% at an annual rate in the September quarter, and is now 4.3% above year-ago levels. This is strong in absolute terms, and surprising given that productivity is usually weak when output is falling. Historically productivity growth has driven real wage growth but now productivity can be a mixed blessing. First, because it's now being achieved by more labor cuts which remain severe cycle headwinds for an already-stretched household sector. These job cuts explain one-half of what is now a remarkable conjunction: the decline in the wage share of GDP to an all-time low occurring as consumer spending share of GDP hits an all-time high. The gap between wage income and consumer spending is, in our view, unsustainable. Either workers will need to be paid more, or will spend less. This is why we don't think that a sustainable profit cycle can be built on cost-out.The second reason productivity growth may not be helpful is because it is deflationary. Nominal unit labor costs (important inflation factor) are now falling rapidly due to productivity growth and low nominal wage payments. If income growth is stagnant or falling in nominal terms, it threatens to exacerbate the risk of serious deflation and double-dip. For now, this is not our US team's base case. But, as Dick Berner notes, weaker-than-expected hours and core income growth is a key risk to his slow recovery view. It now seems that too much cost-out may be too much of a good thing.

MACRO CALENDAR:UK Labour market report, 09:30 Claimant Count (Oct) ~ MSe 21.0k / Cons20.0k / Last 20.8k: We do not expect a pickup in the pace of increase in claimant unemployment and forecast a 21K rise in the claimant count on the October data (after 20.8K in September). We expect the unemployment rate (3Q) to have ticked up to 8.1%. On average earnings growth for September, we expect the headline measure (including bonus, 3M/Y) to fall to +1.4% (from 1.6% in August). This series has been volatile lately. UK Bank of England Inflation Report (Nov) 10:30 This is, as ever, a key risk event for sterling markets. The statement accompanying the MPC's decision to extend QE gave nothing much away, either in terms of forward looking signals or in terms of the trigger for their decision to extend QE. We assume that they have revised down their underlying medium-term inflation forecasts. Things to watch include the inflation fan charts, additional insights into their most recent policy decision and any further information relating to lowering reserves remuneration. Also, we will be looking out for explanations of why the Bank of England extended QE at their recent meeting (although we may have to wait until the MPC minutes the following week for colour on this).